Business

Your mortgage Brexit conundrum

It's a different scenario going for a mortgage today
Peter McGahan

HOW many of today's home owning millennials might see talk of mortgage rates at an average of 8 per cent as nothing more than a campfire horror chat (17 per cent stories, of course, is just the scout leader trying to get you into bed before its dark!

That is, however, what happens when tricky scenarios are not managed well.

For mortgagees today, the never-ending Brexit saga creates a virtually impossible mental battle on whether or not to fix their mortgage.

Companies don't go bust because of a lack of assets or revenue. They, like house owners, fall into difficulty because of cash flow.

Between 1979 and 1991, rates moved between 17 per cent to 10.35 per cent, never falling below 8.375 per cent, and it was only the low of 2003 at the beginning of the Iraq war that saw rates at a super low of 3.75 per cent.

Outside of that, it was unheard of. In fact, if we exclude the extreme measures taken by central banks since 2007, the average Bank of England base rate has been a staggering 8.4 per cent.

Residential mortgage lending in the UK currently totals over £1.4 trillion. Comparing just the cost of interest at base rate, today's borrowers might be paying over £110 billion per year less than the average rate mentioned above.

I'm sure you can calculate what your mortgage would be at 8.4 per cent. So where are the current headwinds?

Fundamentally, it's a Brexit toss of a coin, but the risks have become much greater.

Is what Boris Johnson or Jeremy Hunt saying true? Will they really hold to dump the Irish backstop and go for a Hard, no deal Brexit, or are they just appealing to win a leadership contest?

If they take the hard line, the impact on the UK, which is already nearing recession would be significant. Sterling would carry on as it has done – southwards, and inflation would rise, as the UK is a net importer, and those goods/services would simply cost more.

The easy tool used by central banks to slow inflation, is of course, interest rates, so your gamble on whether or not to fix, relates to what may happen on Halloween with the new leader of the government. I'm not going to call that!

For sure the risks are there. ‘Options', (where traders bet on how markets will move), show that traders are prepping for turbulence in Sterling below current levels, and one thing for sure, some of those unscrupulous traders will enjoy every single headline and remark to push the currency down.

Remember they can make money by upward or downward movements, simply by betting on its swings. Volatility is their dream.

Consider that Sterling has lost near 5 per cent against the Dollar since May, and anything that can get cheap can get a whole lot cheaper.

For there to be a soft Brexit, MP's will have to approve the existing arrangement, or Brussels will have to renegotiate, and neither appear likely.

The FT has recently pointed out how the UK is edging closer to recession, and the latest Fulcrum nowcasts show UK activity growth at minus-0.8 per cent, as opposed to plus 1 per cent in May.

Mark Carney has also pointed out that UK investment had fallen about 12 per cent below what would normally have been expected, and versus other economies, since Brexit was announced.

Most markets don't expect a hard Brexit, so this will only weigh heavily on UK domestic stocks/shares as well as Sterling, once again driving inflation upward.

The economy however, may need to be placed before inflation (the imported inflation above), and that's where your mortgage gamble is muddied further, as Mr Carney's strong words of the ‘sea change' in global trade and Brexit risks, mean he may need to be more relaxed with interest rates.

The better fixed rates are currently sitting at 1.49 per cent (two year), 1.59 per cent (three year), 1.84 per cent (five year) and 2.39 per cent (10 year).

For those where budgeting is the key, knowing what you will pay per month may be more important than gambling on the current Brexit stalemate.

:: Peter McGahan is chief executive of independent financial adviser Worldwide Financial Planning, which is authorised and regulated by the Financial Conduct Authority. If you would like to know the best mortgage rates available today, call Darren McKeever on 028 6863 2692, email info@wwfp.net or visit www.wwfp.net.

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